Mark Vasilantone couldn’t help but feel a little disappointed in 2015 when he surveyed the initial leads on sites for a new manufacturing facility.

His company, Vastex International Inc., had grown from a few thousand square feet of leased space in East Allentown in the late 1990s to a 23,000 square-feet operation. With business booming at Vastex — a manufacturer of screen printing machines — Vasilantone decided it was time to look for a facility in the 30,000- to 60,000-square-foot range.

Vasilantone hoped to find a building in Allentown or Bethlehem to ensure the business would retain its employees. But the first few sites his broker showed him were near Quakertown and Wind Gap. Another property in Easton was a little better, but still would have been “a downer,” he said.

“There was nothing,” he said. “We worried that we either had to take the plunge on a less-than-ideal property or risk interest rates going up,” he said.

Despite — and partly because of — the considerable growth of the industrial market in recent years, real estate brokers and economic development officials say burgeoning manufacturers often struggle to find suitable space to grow in the Lehigh Valley.

While the emergence of the Lehigh Valley as a distribution and e-commerce hub has helped attract manufacturing, experts say it has also inflated land costs and crowded out development of smaller-footprint industrial flex spaces needed to support those sectors.

In fact, flex buildings ideal for modern small manufacturers simply haven’t been built in recent years. Only one building between 40,000 and 80,000 square feet was completed in the first nine months of 2017, according to the Lehigh Valley Economic Development Corp., and over the past four years, inventory has grown less than 2 percent. During the same time period, the overall industrial market has grown nearly 17 percent.

And though vacancy rates have dipped below 5 percent across the industrial market, they’ve fallen to 3.6 percent for 40,000- to 80,000-square-foot industrial flex buildings, according to LVEDC.

“Five years ago, you might have had 10 to 15 options to show a client,” Kim Jacobsen, managing director of industrial services with Jones Lang LaSalle, a commercial real estate firm, said at a LVEDC event last month. “Now, depending on the size range, you have two if you’re lucky.”

Developers and real estate experts cite numerous reasons for the shortage. Existing industrial buildings between 40,000 and 80,000 square feet are 64 years old on average, according to LVEDC. They frequently don’t meet the requirements of modern manufacturing, including taller clear heights and tractor-trailer access.

Developing new flex spaces necessitates the same time and money spent on land development approvals as million-square-foot behemoths. Fixed costs related to utility infrastructure at least match, and often exceed, those associated with big boxes. Consequently, smaller buildings cost more per square foot — often exceeding $50, according to Joe Correia, executive vice president with J.G. Petrucci Company, one of the few companies has has consistently developed flex space in recent years.

Because the buildings take at least two years to develop, it’s rare to develop with a specific tenant or buyer in mind, and lenders are less willing to finance smaller speculative buildings when larger ones are less risky and more profitable.

“At the end of the day you need to get a lender on board, and it can be really hard to make the economics work,” he said.

When Vastex couldn’t find an existing facility, it decided to build instead. The company lucked out – broker Mike Adams of NAI Summit found it eight acres on former Bethlehem Steel property in Lehigh Valley Industrial Park VII. Vasilantone called it “an oddball property” – and love at first sight. He made an offer during the holidays two years ago and moved into a 37,500-square-foot facility this fall. It’s the smallest building in the park.

‘No you can’t do it’

Others remain flummoxed. Take Rea.deeming Beauty of Hanover Township, Northampton County, which makes a pink sponge (called the beautyblender) used to apply makeup . From 2013 to 2016, the manufacturer went from a 6,000-square-foot operation to outgrowing a 63,000-square-foot facility. Shipping up to 47 pallets of product a day, its staging area had spread beyond one contiguous area, causing logistical headaches.

APRIL BARTHOLOMEW / THE MORNING CALL

Catherine Bailey, president and COO of Rea.deeming Beauty, during a tour of its Hanover Township, Northampton County facility in 2016.

Catherine Bailey, president and COO of Rea.deeming Beauty, during a tour of its Hanover Township, Northampton County facility in 2016. (APRIL BARTHOLOMEW / THE MORNING CALL)

Catherine Bailey, president and chief operating officer, started searching the market last year for a facility that offered roughly 75,000-square-feet of light industrial and 25,000-square-feet of office space. Like Vasilantone, she wants a facility within a reasonable commute for existing employees that also supports the future growth of the company as it launches a new segment in 2018.

“It’s been extremely frustrating,” Bailey said. “I was in real estate for very long time, and I understand economies of scale, but I’m also not used to being told ‘No, you can’t do it.’ There’s got to be a way.”

Don Cunningham, president of LVEDC, shares her frustration. Some businesses considering expanding or relocating to the Lehigh Valley moved on after not landing an acceptable lease or property acquisition, he said.

Just this week, healthy snacks maker Terrafina announced it’s relocating from the Bronx to an 72,000-square-foot facility in East Stroudsburg, creating 120 jobs. The company looked at the Lehigh Valley, but couldn’t find the right space, Cunningham said.

“We have this window of opportunity where the economy is going strong and there’s a lot of interest in doing manufacturing in this region because of our distribution and logistics assets and our great workforce,” he said. “We would hate to see that window close without us capitalizing on it.”

Justify a profit

The Lehigh Valley is not alone in confronting this issue, said Michael Alderman, a vice president of Liberty Property Trust, the largest industrial landlord in the region.

In the 1970s and 1980s, he said, local private developers reigned over any given region’s real estate industry. Now a smaller number of large development companies, including public real estate investment trusts like Liberty that are accountable to shareholders, hold sway.

“In order to justify pursuing a project on a speculative basis, they need to know what the costs will be and what kind of rents they can expect to receive,” he said.

More than half of Liberty’s 68 Lehigh Valley tenants do manufacturing, but in primarily larger buildings. Alderman perceives a “chicken and egg” situation: Because not many smaller-footprint buildings have been built recently, institutional developers struggle to gauge the value of such a project. And though tenants may very well be willing to pay premium rent given a shortage of space, developers would rather stick with the sure thing – larger projects.

“A 20,000-square-foot speculative industrial flex building may be market-appropriate to build, but it may represent too small of an investment for an institutional developer to spend time on,” he said.

Companies like Vastex were the nonprofit’s “core customer” in earlier industrial parks. But larger-footprint users have flocked to LVIP VII in south Bethlehem because demand for smaller buildings simply did not return after the Great Recession, Wrobel said.

Wrobel believes many manufacturers delayed expansion in the face of economic uncertainty, costly health care mandates and stricter banking regulations, among other factors.

In a way, Vastex acted as a harbinger. In the past year, Wrobel said, he’s received more calls from businesses looking for facilities under 60,000 square feet than he had in any other year the past decade.

Of LVIP VII’s 1,000 acres of former Bethlehem Steel land along Route 412, about 170 acres have yet to be redeveloped. Wrobel said one manufacturer is planning to build a roughly 40,000-square-foot facility in the next two years, and LVIP is talking to another business looking for a 50,000-square-foot facility.

“We are trying to do our part to address the gap,” he said.

Several recent and upcoming projects suggest the development community is beginning to address the demand for industrial flex space, says Jarrett Witt, LVEDC’s director of business development.

Petrucci expects to finish a two-tenant, 120,000-square-foot building next spring on Emerick Boulevard in Bethlehem Township. OraSure Technologies, the Bethlehem-based manufacturer of medical-testing and specimen-collection devices, will occupy 70,000 square feet. Petrucci also is building a 48,600-square-foot building off Route 512 in Hanover Township, Northampton County, and recently delivered a 21,000-square-foot building in Upper Macungie Township.

Andrew Wagaman/THE MORNING CALL

J.G. Petrucci Company is building a 120,000-square-foot building between Emerick Boulevard and Route 33 in Bethlehem Township.

J.G. Petrucci Company is building a 120,000-square-foot building between Emerick Boulevard and Route 33 in Bethlehem Township. (Andrew Wagaman/THE MORNING CALL)

DCT Industrial Trust and Griffin Industrial Realty have started construction on 112,000- and 134,000-square-foot buildings, respectively, in Upper Macungie, departures from their traditionally much larger projects, Witt said.

LVEDC is working with both Lehigh and Northampton counties’ Industrial Development Authorities to encourage more development. For example, Northampton’s IDA and General Purpose Authority is helping Petrucci finance a 44,000-square-foot facility straddling Bushkill and Plainfield townships. The site is ready to develop. Another developer is working with Lehigh’s IDA on a project near Route 309 in South Whitehall Township.

Cunningham also sees an “incredible opportunity” for urban manufacturing to experience a revival given the efforts by the Allentown and Bethlehem Economic Development Corporations to clean up brownfields and help fund development.

“These are all viable solutions, but they take time,” he said. “You’ve got demand in the pipeline… so we have to be hopeful that we can find some space in the meantime.”

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